Why firms hold cash? How they save? Is there an optimal level of liquid assets? What factors influence these choices? How cash holdings affect firm value and performance? How they impact the rest the economy? These questions are of long standing and lie at the heart of corporate finance. Indeed, from funding day-to-day operations to financing long-run investment, internal funds represent the simple most important source of financing. According to Mayer (1990), approximately 75% of all net financing occurs through the use of cash reserves, as opposed to debt, convertibles and equity.

As a result, understanding cash policy appears to be an essential element if we want to enrich our knowledge of how corporations are financed, and what are the real implications of their financing choices. Surprisingly, despite their ubiquitous role in corporate life, cash holdings have long been left unexplored by finance researchers. Recently, however, the finance profession has progressively started to pay a closer attention to firms’ cash positions. By and large, two related facts have contributed to place corporate cash holdings under the spotlight.